Yahoo Finance Shopping Centres Australasia Property Group's (ASX:SCP) Dismal Stock Performance Reflects Weak Fundamentals
It is hard to get excited after looking at Shopping Centres Australasia Property Group's (ASX:SCP) recent performance, when its stock has declined 5.6% over the past month. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Specifically, we decided to study Shopping Centres Australasia Property Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Shopping Centres Australasia Property Group
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Shopping Centres Australasia Property Group is:
7.5% = AU$161m ÷ AU$2.1b (Based on the trailing twelve months to December 2019).
The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.08.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Shopping Centres Australasia Property Group's Earnings Growth And 7.5% ROE
When you first look at it, Shopping Centres Australasia Property Group's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.2%. Still, Shopping Centres Australasia Property Group has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.
We then compared Shopping Centres Australasia Property Group's net income growth with the industry and found that the average industry growth rate was 8.4% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for SCP? You can find out in our latest intrinsic value infographic research report.
Is Shopping Centres Australasia Property Group Using Its Retained Earnings Effectively?
Shopping Centres Australasia Property Group seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 86%, meaning that the company retains only 14% of its profits. However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the absence of growth in earnings.
In addition, Shopping Centres Australasia Property Group has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 92% of its profits over the next three years. Accordingly, forecasts suggest that Shopping Centres Australasia Property Group's future ROE will be 6.7% which is again, similar to the current ROE.
Conclusion
On the whole, Shopping Centres Australasia Property Group's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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